Question

able to apparent inefficient use of labor time? cost is not of concern? between this efficiency variance and the labor efficiency variance? rances computed in Standard Quantity or Hours Standard Price or Rate Standard Cost Variable manufacturing overhead Total standard cost per unit. 2.5 ounces 1.4 hours 1.4 hours $20.00 per ounce $22.50 per hour $3.50 per hour $50.00 31.50 4.90 $86.40 PROBLEM)-14 Basic Variance Analysis L010-1, L010-2, LO10-3 Fludex, is prepared using an elaborate distilling process. The company has developed standard Becton Labs, Inc., produces various chemical compounds for industrial use. One compound, called costs for one unit of Fludex, as follows: Compute the variable overhead rate and efficiency variances. What relation can you see Direct materials Direct labor. per hour 4. Compute the rate and efficiency variances. b. In the past, the 35 technicians employed in the production of Fludex consisted of 20 senior technicians and 15 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to reduce labor costs. Would you recom- mend that the new labor mix be continued? Explain. During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12,000 ounces at a cost of $225,000 b. There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory. C. The company employs 35 lab technicians to work on the production of Fludex. During November, they each worked an average of 160 hours at an average pay rate of $22 d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200. e. During November, the company produced 3,750 units of Fludex. Required: 1. For direct materials: a. Compute the price and quantity variances. b. The materials were purchased from a new supplier who is anxious to enter into a long- term purchase contract. Would you recommend that the company sign the contract? Explain. 2. For direct labor: kuni 1010-1, L010-2, L010-3 The plant has

Answer 1

1)

(a)

Material Price Variance

Actual Quantity Used X ( Standard Price Per Unit - Actual Price Per Unit)

= 9500 X ( 20 - 18.75) = $ 11875 ( F )

Material Quantity Variance

Standard Price X ( Standard Quantity - Actual Quantity)

= $20 X ( 9375 - 9500 ) = $ 2500 (A)

(b)

It is seen from the material price variance that there is favourable balance of $ 11875. This favourable balance has come cause the actual price of the material is $18.75 which is less than the standard price of $20 of the material. So, we should go for the new supplier of material cause he is giving us much cheaper cost material than our standard price of our material.

Working Note

1) Actual Quantity of Material Used =

Material purchased - Closing stock of Materal = ( 12000 - 2500) = 9500 ounce

2) Standard Quantity of Material

Standard Quantity of Material Per Unit X Actual Number of Units Produced

= 2.50 ounce X 3750 units = 9375 ounce

3) Actual price of materian Per Unit = $ 225000/ 12000 ounce = $ 18.75 per ounce

2)(a)  

Labour Rate Variance

Actual Hours Worked X ( Standard Rate Per Labour Hour - Actual Rate Per Labour Hour)

= 5600 hrs X ( 22.50 - 22.00) = $2800 (F)

Labour Efficiency Variance

Standard Rate Per Labour Hour X ( Standard Labour Hour - Actual Labour hour)

= $ 22.50 X ( 5250 - 5600) = $ 7875 ( A)

(b) It is seen from the Labour Efficiency Variance that there is an advarse balance of $ 7875. This shows that the current mix of labour is not good for the company. This labour mix has adverse impact on the profit of the company. So, the comapny should increase the numbers of the technicisions.

Working Note

1) Actual Hours Worked = ( 35 X 160 ) = 5600 dlh

2) Standard Hours = ( 1.4 X 3750) = 5250 dlh

3)(a)

Variable Overhead Rate Variance

Actual Direct Labour Hours Worked X ( Standard Rate Per Direct Labour Hour - Actual Rate Per Direct Labour Hour )

= 5600 dlh X ( 3.50 - 3.25) = $ 1400 (F)

Variable Overhead Efficiency Variance

Standard Rate Per Direct Labour Hour X ( Standard Direct Labour Hour - Actual Direct Labour Hour).

= $ 3.50 X ( 5250 - 5600) = $ 1225 (A)

(b)

The Variable Overhead is absorbed on the direct labour hours. So, as the direct labour efficiency variance s adverse so its also give impact on the variable overhead and variable overhead efficiency variance is also adverse.

The reason of this advarse balance is direct labour is taking more time to produce the product than the standard time. Due to this reason labour efficiency and variable overhead efficiency variance is advarse.